When you purchase a vehicle, you basically have 3 options: finance, lease or pay with cash. I don’t know about you, but I don’t have the patience to save that much cash. Plus you’d get higher return on that money by investing it compared to financing interest rates. So realistically that leaves you with financing or leasing.
In my case I learned about both sides of the financing vs leasing debate from my family…
My Leasing Grandpa
My late grandpa leased cars pretty much his whole life. Every few years he’d have a brand new car which at the time I thought was pretty sweet. I guess since he was a driving instructor he felt obligated to always have a new car to use during lessons. That and his slow driving must’ve kept the cars in pretty good shape helping him avoid any extra trade-in charges. Tax benefits probably also played a role in his thinking.
In reality though this route ensured that he always had a monthly car payment. There was never a point when he could stop making payments and actually call the car his own. Basically he was just renting a car his whole life.
Normally people would have the option to pay to actually buy the car once the lease runs out. The problem with that is that there is always a high amount owing. Then you’re back to square one of needing a big chunk of cash or some kind of financing. Usually the monthly leasing payment is very close to what financing payments would be, but with leasing they don’t credit that full amount towards buying the car at the end.
When you trade the vehicle in you have to pay more if you rack up a lot of mileage too. Since the car is never truly yours, you are pretty restricted in what kind of changes you can make to the vehicle. Also you’d likely have to pay higher insurance rates while financing.
My Financing Mom
I remember my mom telling me to never lease a car, explaining how much more expensive it is without the vehicle ever becoming yours. Besides the cheap cars she bought early on, she would always finance her cars. She recognized the value in eventually owning the vehicle and not having payments. Her monthly payments were actually going towards a possession that she could one day sell and recoup some of the money.
If she wanted to, she could’ve saved up cash to get a new vehicle, but sometimes you have to replace your vehicle before you had planned. With her Honda Civic she happened to hit a moose and was suddenly forced to get a new car. She also had better uses for that cash such as purchasing a business and saving for retirement. I’m sure she got a better return on her money with that route.
With the financing route you get the freedom of the car actually becoming yours. There are no restrictions on how far you can drive each year. You are free to install a new stereo or alarm system. You could even paint in a different color or trick it out like an episode of Pimp My Ride.
Summary
So regardless of whether you want to drive a BMW, Suzuki Grand Vitara or Dodge Grand Caravan, it is almost always a bad idea to lease instead of financing. Unless you are getting tax benefits from running a business, you are likely getting a lousy deal. Instead of leasing, take the time to shop around for a good financing deal with a low rate.
Nice post. I know many people like to lease, but it just is not for me. We bought our last car with a nice down payment (which we just paid off last week btw!) and now it’s ours. With leasing you’re pretty much always having a payment to make, which would suck in my opinion. Sure, you may have a new car every few years, but you do have pay for it.
John S @ Frugal Rules recently posted..4 Simple Ways to Save Money on Taxes Before Year End
Yeah I couldn’t imagine having non-stop car payments to always make. A new car every few years just isn’t worth it to me. I think a lot of the people leasing cars don’t really stop to consider all the downsides.
I’d have to say that having a payment is far less of a drawback than anything else when it comes to my leasing experiences. Granted, I don’t drive a ton so the mileage cap isn’t normally a concern for me, and I do take a portion of my payment against my business, but there’s more to it.
For me, I like getting the basic service included like oil changes and car washes. Some dealerships even offer discounted gas to their lessees. Then there is the non-issue of mechanics–you know that the longer you drive a car, the more susceptible to failure the parts become and the less efficient the car is. Switching out cars every 3 years or so means not having to worry about that stuff, or having to worry about getting the best deal possible on a trade when you need to get a new one for whatever reason. And, in some instances, like with Honda there is a $1,500 wear & tear allowance that pretty much covers up to that amount in repairs.
I’m not saying that leasing is for everyone, but it does have its advantages. Just like everything money-related, it’s a case of what works best for each individual.
Eric J. Nisall – DollarVersity recently posted..Prepaying Expenses May Not Be Your Best Option
Yes there are some advantages, but a lot of that stuff is there because the dealership knows they are still getting the better side of the deal. As nice as it sounds to have that stuff take care of, I’d gladly pay for all of that to eventually be free and clear of pay payments. It’s not a route I’d ever go anyway.
I don’t think I would ever lease. I like to pay off my car and fully own it!
Michelle @ Making Sense of Cents recently posted..Retiring Abroad?
I’m the same way. Unless you get tax benefits from it, I just couldn’t see why someone would want to spend so much more money.
My parents lease their cars and like Eric said above they find the benefits to be well worth it. They only like to keep their cars for a few years so it works out better than trying to sell a car so often.
We just bought a new (used) car and I thought about leasing. Instead we got a car loan for 1.49% and are financing it.
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It just seems like a lot to pay for those benefits. Yes it would be nice, but personally I’d rather choose to have a bit of financial freedom in between financing cars.
I think cash vs financing is an interesting debate that depends on current financing rates and risk tolerance. I am glad you know your tolerance and have made the right decision for you. I also financed my first new car because 0.9% was a no brainer for me.
Lance @ Money Life and More recently posted..What Would You Do?: Kid’s Fundraisers & Charity Donations at the Office
Yes when you can get that kind of financing rates it is pretty tough to turn down. Even with a very secure investment option, you can easily make more than a 0.9% return.
Back when we had a car, we owned it outright. But the insurance and gas was still a pain. For the last few years, we use car sharing
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With how much less I’m driving now that I use public transit to get to work, it would be nice to not be paying for insurance. I don’t think I’m willing to go with a car sharing program though. I’ve gotten too used to the convenience of always having a car.
I’ve never leased a vehicle before and don’t think that I ever will. I understand that there will be repairs that need to be paid for while owning a vehicle and I’m ok with that. It has been over a year since I have had a car payment and almost two since the wifes was paid off. In that time we had maybe a total of $500 in repairs for normal stuff like brakes. Not having a monthly payment has been nice. Just like paying rent I think leasing a vehicle is just making someone else money.
Stan @DebtsnTaxes recently posted..Paying For Your Childs College Education
That’s true. The cost of any repairs of maintenance is rather minor compared to continued monthly payments. Get a good reliable car and take proper care of it and you won’t have to spend too much extra.
If you can offset the costs of leasing in your tax return like your grandpa, it may be worth it. Financing can be great to when they give you 3 years at 0% or 1%. In other cases, I would try to buy cash.
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I don’t think I’d be willing to save up that much cash when it could instead be getting me a decent return in stocks. I do wonder how much could be benefited tax-wise from leasing compared to financing.
I wouldn’t either. They are such a waste of money anyway. My car philosophy is to buy in cash then drive them until they cannot drive anymore!
Holly@ClubThrifty recently posted..What I Want My Kids to Know About Money
Keeping a car as long as possible is a good strategy provided that you don’t eventually run into costly repairs. I’m still not sold on paying for a car with cash though. It seems like wasted potential interest to me.
“I don’t have the patience to save that much cash. Plus you’d get higher return on that money by investing it compared to financing interest rates.”
If you don’t have the same amount of money to invest, then you are actually losing money, because the interest spent on financing is MORE than the interest earned on investing. So you NEED to save up all the cash first before buying the car, whether you finance or not.
The only way this works out is if you have an identical amount (or more) invested to bring positive cashflow in earnings vs. the interest you are spending on the loan.
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Also, my car rule is to NEVER buy something newer than 5 years old and purchase with cash only
I can see the benefits of having money invested and outearning your interest rate on the loan, but I don’t like to play with debt that way.
Jacob @ iheartbudgets recently posted..How To Kill Financial Temptations
I don’t really agree with your point about the financing interest being more. For most people it would take years to save up enough money to buy a decent car. In that time they would be missing out on plenty of interest. Provided you get a good financing interest rate, there are plenty of investments that out-earn that. Technically you could wait as long as it would take to save up that amount and get to the same total in investment and be earning good interest in the meantime.
We self finance by making a monthly payment to the car fund. We then pay cash for what we want and pay ourselves back. It’s not easy to start but it is nice to pay cash and not have to talk to the finance person at the car dealership.
I also could never lease a car for personal use since I am a heavy driver and would crush any mileage allowance.
I don’t mind talking to the finance person at the dealership. I just would hate to see so much potential interest missed out on while saving up.
Totally agree with you dude. I would never lease either… I have just bought a new car on a low interest rate loan… I will own it entirely in 4 years.. no final payment and it will be worth something to trade in one day
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It will be satisfying when the car is all paid off and you can direct that monthly payment money to your retirement savings.
I don’t lease cars either, but in my practice there were some clients who NEEDED a new car all the time for work. By leasing they only had to pay the depreciation on the new auto, so it was easily the most economical way for them to constantly stay in a new ride.
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I guess there would be certain professions where this might be required. In that case it would make sense. I wonder what percentage of lessees are actually in that situation where they really need it.
I’ve never leased nor financed a vehicle before so I don’t know if I would like it or not. I paid cash for my truck and car. Mrs.CBB on the other hand financed her vehicle 0% over 5 years and it was the best route for her. She paid no interest and was able to get a great deal. She did just say that she would have only financed for 0% otherwise she would have to think more about the entire cost. Great post.. Mr.CBB
Canadianbudgetbinder recently posted..Surviving A Lower Income On Maternity Leave In Canada
That’s crazy that there is such thing as 0% financing for that long. At that rate it wouldn’t make sense to not finance.
I would never lease a car if I wasn’t a business owner but as I am I’ve seriously considered it on many occasions. Sometimes It makes more sense to spend your money, especially if it’s 100% tax deductable like it is when you lease a car in the UK. I assume that’s still the case, I’ll look it up!
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I dunno…even if it is a big tax deduction, you are still paying a big chunk of that after taxes are all said and done. So even in that case, I’d think it would really need to be a business where there was some kind of reasoning to always have a new car.
Thank you MM for giving me inspiration for my next blog post:
Why I would NEVER pay cash or finance a car… Leasing is exactly what I need.
Why?
In my tax jurisdiction (Canada) and being a self-employed person leasing is a 100% deductible business expense. (excluding your personal use of course) So that means my payments, insurance, gas, parking, oil-changes, etc. are 100% tax deductible.
So, not only do I get to hold on to my capital (and keep it invested earning +7%) I only have to pay (at current market rates) about 0.9% financing charges on top of the cost of the car.
ADD to this, the savings I get from taxation and it effectively saves me THOUSANDS of dollars provided that I buy out the car at the end of the lease.
I boiled down all the numbers before and it saved me about $4k off of a $30k car thanks to the tax savings.
So before you shake your head and wag your finger, take a look at the tax advantages in your particular jurisdiction and for your employment situation.
The long and the short of it for most North Americans would be that if you’re a small business owner or a self-employed person, lease the car to save on taxes. If you’re a worker-bee sitting answering phones and/or pushing paper every day in a cubicle-farm then finance your car.
Even if you’re independently wealthy… finance your car! I’m sure your invested money is earning MORE of a return than the current vehicle finance rates are costing you.
thestarvingartistcanada recently posted..RESP confusion
How many people actually buy out their car at the end of a lease though? I’d think the majority would just trade it in for another new car. Also wouldn’t it be a big red flag with the tax man to claim a large percentage of a vehicle for a small business or self employed situation? I think you’d probably have to be in certain industries where there is a reason to be driving so much for your business. I know I wouldn’t be able to get away with it for my online business.
As for the red-flag… Nope. You just have to keep a mileage log. It’s very simple to defend that yes, I did have to drive to my gigs.
Big businesses LEASE fleets of cars. ALL of the usage is deductible for them. Even if employees use them for personal usage too.
There are limits of course… you can only write off fair usage. For example you can’t use your deductions to show a net loss. A ZERO yes! But not a loss. (You simply deffer the deduction until you need it!)
You would be able to deduct from your self-employed income provided you were making justifiable trips with your vehicle. Meetings with advertisers, trips to and from office supply stores, computer store visits, and the occasional business lunch. If you lived where I do, you would also be able to write off a portion of your rent/utilities for home-office.
It’s best to check with an accountant who knows his stuff rather than the college drop-out working at the super-store tax office or the H/R Block.
There are so many hundreds/thousands of rules, but the deductions are there if they are reasonable. A small-business/home-office type accountant would be able to help.
thestarvingartistcanada recently posted..RESP confusion
I will own my car in less than two years.:) There’s just something about the feeling of pride of ownership….One thing I wish I did was buy it used though.
I’m in the same boat. I regret not buying used too. I didn’t get financially disciplined until I got into the financial blogging community. Now I couldn’t imagine buying new.
I don’t think I’d ever lease a car either. My dad always leased a truck when he owned his business, but it was for reasons you mentioned. I hope my car lasts another 10 years and I won’t have to worry about it for a while.
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That would be ideal if a financed car lasts nice and long. Then it’s sure to be a better deal than leasing.
I’d lease a car, I don’t see why not. My situation is that I don’t need to travel far, so I use public transport to get to and from work. If something changed I could go on a contract and enjoy the vehicle for a bit. Alternatively there’s always a bicycle! What would be amazing if we did away with cars entirely and just drove around everywhere in Go-Karts. I’d sign up for that.
Go karts wouldn’t be too practical around here with all the rain we get. For me I’d choose overall savings over any perks you get from leasing.
Agree with you on this one. We buy our cars and drive them until they die.
DC @ Young Adult Money recently posted..Considering Grad School? Get Ready for Standardized Tests
That’s the only route that seems to make sense for me. I couldn’t see myself needing the luxury of a new car so often.
I also will never lease a car (I think). At this point I try to purchase and own quality vehicles and then drive them forever. My Volvo is my biggest example. It is going strong now for 10 years, and I want to drive it another 5-10 years at least.
Jason Clayton | frugal habits recently posted..Frugal Habits of the Rich and Famous
I’ve had my car for over 6 years and should be able to keep driving it for a while. Problem is that it might not be very practical if I started a family.
If you tend to get a new car every 5-10 years then leasing is a viable option. I don’t think many pf bloggers or readers do this though
If you pick a reliable car with low maintenance costs then buying new is not a bad idea. Personally, I don’t like to go into debt for non-appreciating assets(I think it’s kind of a bad habit to get into: cars first, then vacations, etc). Even though auto loans are advertised at pretty low rates, I think most people end up getting higher rates.
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Financing a used car would be even better though. Then you don’t have to absorb all that depreciation. You do have to consider your personal situation. You’re right that not everyone gets those super low rates.
I pay cash for the cars. But I have financed cars few times before for my businesses for the tax benefits at a zero interest rate. If I have to pay more than 3% interest, I would not finance a car.
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That’s probably a good rule of thumb. Sure you’d have a good chance at earning more than that in investments, but it’s not guaranteed.
“I don’t know about you, but I don’t have the patience to save that much cash.”
If you have the patience for a payment, you have the patience to save the money. You just have to be willing to think a little differently and commit to driving a paid for car and pay yourself a car payment until you have enough for your next car. I’ve bought a Lexus and an Infiniti this way.
I wrote a post about it a while back that may be of interest titled “How NOT to Finance a Car”- http://bit.ly/RhgEWm
I guess I just haven’t been in a position to be able to wait to buy a car in cash. I’ve only owned 2 different cars. The first one I felt the need to finance because I had a very inconvenient commute to work and didn’t know enough about cars to get something cheap. With the 2nd car I had crashed my first car and suddenly needed a new vehicle. So waiting wasn’t really an option. Even if I could wait though, I’d rather put the money towards an investment.
Nice post and good info. We’ve never leased, but are now considering given some of the very reasonable deals out there. In our case it might be a good solution for the next couple of years with two in college and the “need” for an additional car aka our youngest bugging us for one of the family cars at school. I tend to agree with what you said and am at best lukewarm on the idea.
Roger @ The Chicago Financial Planner recently posted..Friday Finance Links October 19, 2012
That’s an interesting situation to consider leasing a car. I guess it’s either that or help him a cheap car of his own.
Thank you, thank you, thank you!
I’ve felt for a long time that leasing was just ensuring a car payment, and I HATE car payments. It’s nice to see someone else have the same opinion.
I try not to finance, but it is unfortunately a must given my family finances. But I try not to buy too much car, and finance only a portion of the cost. My goal is to purchase my next car with 0 financing!
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Scoring 0% financing would be pretty sweet, but it sounds like those offers are only available on specific new cars. You’d get a much better deal buying a slightly used car. At least I know you won’t make the mistake of leasing.